Borrowers

Equity for Over-Leveraged Commercial Properties

Do You Have a Balloon Payment Coming Due On Your Commercial Property? Is It Too Large to Be Refinanced?

In Return for Part Ownership, We Will Reduce The Size of Your Ballooning Commercial Mortgage

Five or ten years ago you borrowed $750,000 on your commercial property. Now the remaining $730,000 balloon payment is coming due. The bank is willing to make a new commercial first mortgage of $600,000 - but not a penny larger. They expect you to bring $130,000 in cash to the closing, but you just don't have it.

Blackburne & Brown Equity Preservation Fund may be able to solve your problem. In return for part-ownership of the LLC that owns your commercial property, we'll bring $130,000 in fresh equity capital to the closing table and pay down your ballooning mortgage from $730,0000 to just $600,000.

"Gee, George, this sounds interesting. What interest rate am I going to have to pay on this $130,000 in new equity capital?"

There is no interest rate because this new money is NOT a loan. The Fund will simply be your new "partner" (fellow LLC member) in the property. In lieu of any required interest payments, the Fund will just take a share, on a percentage basis, of any profits or losses enjoyed or suffered by the property. If you have a bad year, and there are no profits to share, you don't pay us anything.

"Gee, George, I just hate the idea of giving up a part of the ownership in this property."

If you don't do something about this balloon payment soon, you are going to end up owning 100% of nothing. And what about the deficiency judgment? Suppose the bank bids just $400,000 at the foreclosure sale. They could come after you and your wife for a deficiency judgment of $330,000. In theory, you could lose your family home too. At a minimum, your credit will be destroyed, and you will lose your access to cheap bank capital for the next seven to ten years.

"Why couldn't I just sell the property?"

Sure, if you get it listed right away. But here are some important words of warning that you should read three times:

In 30 years I have never known of a single commercial property to ever sell once a lender has filed foreclosure. Once the Notice of Default becomes a matter of record, every potential buyer will back out of the deal. Why? Because they all think that they will be able to buy the property directly from the bank at a cheaper price once the foreclosure is complete. (Please re-read this paragraph twice more.)

Then what happens in real life is that the commercial property owner declares Chapter 11, the foreclosure sale is postponed for 18 months, many of the tenants vacate, the property falls into disrepair, the potential buyer loses interest, and then, finally, when the bank is assured of a big loss, the bankruptcy court will allow the property to go to a foreclosure sale.

"How much of the ownership of my property are you going to take?"

Equity investments are high-risk investments. If you can borrow some money on your home or sell some other property to raise the cash to refinance your commercial property, you should do it. Equity dollars are very, very expensive. In any case, each deal is individually negotiated.

That being said, we will be using these new equity dollars to reduce your debt on the subject property. While it's true that you will be walking way from the deal owning less than 100% of the property, the property will now have a whole lot more equity! Before we paid down your commercial mortgage, you owned 100% of a property with a slight negative cash flow. Now you might own 53% of a property with a very nice positive cash flow.

"Gee, George, I just sense that I am going to horrified with the amount of the ownership of the property that your Fund is going to want."

Once again, if you can borrow against your home or sell some property to raise the dough to refinance your balloon payment, do it. Debt dollars are almost always cheaper than equity dollars because equity dollars are the first-loss piece. The first guy to lose a penny if your commercial property goes south is the equity holder.

But if your current options include losing the commercial property in foreclosure, ruining your credit for the next seven years, and then losing your family home to a deficiency judgment collection action, our deal is far, far more attractive. You keep your good credit, you reduce the size of the commercial mortgage that you have personally guaranteed, and you end up owning a sizeable piece of a commercial property that enjoys a handsome positive cash flow.

"Okay, George, I take your point. I do need some help. What do I do?"

Please call me, George Blackburne III (the old man), at 574-360-2486 or email me at george@blackburne.com.